Hard times for Turkey as currency slumps and debts mount,

Unemployment is high and manufacturing has been in decline for years, but President Erdogan still blames outside factors for Turkey's plummeting currency.

International currency exchange rates on display beside the window of a gold vendor in the Grand Bazaar market in Istanbul, Turkey, on Tuesday, July 19, 2016. Ismail Ferdous/Bloomberg

ISTANBUL // In late November, a group of livestock breeders in the central Anatolian province of Aksaray were filmed setting fire to stacks of fake US$20 bills while brandishing a banner that read: “Dollars and euros not valid in our bazaar”.

Though the breeders’ anger was directed at hard currencies, it was among the latest expressions of frustration at the sinking Turkish lira, which has lost no small amount of value against the dollar and euro in recent months, weakening consumer purchasing power and exacerbating the headache of companies with debt in foreign currencies.

On the evening of the July 15 coup attempt, the lira sank by about five per cent to just over three to the dollar — its biggest drop in eight years. Though it bounced back slightly in the following days, it has fallen further since then, standing at about 3.5 on Friday in a Turkey still reeling from a recent deadly bomb attack and the assassination of the Russian ambassador in Ankara.

Earlier this month, president Recep Tayyip Erdogan called upon people to change their dollars into lira in an attempt to bolster the struggling currency, claiming that external forces were trying to destroy Turkey’s economy. Within hours, Turkey’s stock exchange, Borsa Istanbul, converted all of its cash assets into lira. Citizen-led campaigns also popped up throughout the country, offering free haircuts or lunch for those exchanging a certain sum of dollars. Given the lira’s still-dismal state, none of these efforts seem to have done the trick.

“With a presidential referendum coming up in four to five months, it is hard to tell what is propaganda and what is a genuinely held belief or even serious policy nowadays, which I believe is a serious concern for the business community and investors,” said Attila Yesilada, an economist at Istanbul Analytics. “I don’t think these ‘patriotic drives’ have much effect in a country as polarised as Turkey.”

Initially, the post-coup declaration of the state of emergency, the mass purges with arrests and capital seizures damaged investor confidence and sent the lira downwards. But it got even worse in November after Donal Trump was elected US president and the European Parliament’ suspended EU accession talks with Turkey.

“Rather than taking steps to calm international investors, the Turkish government chose to prolong a state of emergency, fuel perceptions of a continued threat and carry out a harsh crackdown against its opponents. Undoubtedly, this reaction has continued to shake any confidence global markets had in Turkey,” said Cenk Sidar, president of the Washington, DC-based strategic advisory and risk assessment firm Sidar Global Advisors.

More than 100,000 people have been sacked from the civil service, the military, judiciary and education system in the drive to cleanse the state of followers of Fethullah Gulen, the US-based cleric whom the government blames for the attempted coup. Numerous lucrative businesses thought to be run by Gulenists have been seized.

“The purge morphed into a witch-hunt, which reflected poorly in the international press, and as the number of businesses taken over by the Turkish Deposit Insurance Corporation grew, investors began staying away from Turkey, ” Mr Yesilada said.

In fact, the lira has been weakening for several years and for long-standing reasons which have little to do with recent events in Turkey.

“The poor performance of the lira is only one of the indicators of the Turkish economy’s major challenges. Turkey has been facing various structural problems, including, but not limited to, high unemployment, a high current account deficit, and unsustainable dependence on foreign capital inflows,” Mr Sidar said.

The prices of imported goods — admittedly not always the most essential item — rise steeply and often. And while smaller niche retailers may still be doing business, bigger operations saddled by debt in foreign currencies are failing, among them food producers, clothing retail chains and supermarkets.

In 2015, 15,000 firms went bankrupt. This year, companies holding debt in dollars and euros are undoubtedly suffering as their lira profits are eaten up by the currency’s loss in value.

Bad foreign policy decisions, erosion of institutions, mistrust in the judicial system and a growing tilt toward authoritarianism have all contributed to the current poor performance of the lira,” Mr Sidar said.

People are still shy to call it, but I believe Turkey is in the midst of a major economic crisis that has been evolving throughout the past five years.”